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Thursday, April 06, 2006

The biggest bust since Lolo Ferrari

Officially, during the last decade, inflation has generally hovered between 1 percent and 3.5 percent...

But in most key areas of the economy, inflation has been off the scale.

A March 2005 report published by Oxford Economic Forecasting and Cluttons Real Estate noted that house prices had risen nationally by an average of 11.4 percent per year every year for the past ten years.

While property prices are controversially not included in the official U.K. inflation figure, similar if not larger rises have been recorded in transportation -- a one-day travel pass in London now costs £6.30 -- utilities, with 2006 seeing a one-year hike of 20 percent for many gas customers, and oil, the price of which skyrocketed following recent instability in the Middle East...

The U.K. economy is built on consumer spending, which accounts for two-thirds of the nation's GDP. But consumer spending is in turn contingent on credit.

The average salary in the U.K. is estimated to be around £22,000 before tax, which in most parts of the country is not enough to comfortably subsist on: for the majority of people, to save anything substantial from that figure would require frugality.

Luxuries such as brand-new home cinema systems and cars should in theory be exactly that -- luxuries.

This is where credit steps in to distort reality.

The UK population now owes £1 trillion in household debt, with 14 percent indebted to the tune of £10,000 or higher.

This debt is more than the total annual GDP of the U.K.

And this figure does not even take into account the gargantuan pile of mortgage-related debt -- £967 billion -- that casts a shadow over the U.K. economy.

Including mortgage payments, the average British household has £83,722 of debt.

What conclusions can one draw?

Firstly, the official inflation figures simply cannot be correct.

Two percent inflation in an economy with rapidly increasing living costs and more credit than real money in circulation does not even begin to make sense.

Secondly, the reason that interest rates have not been pushed up to act as a fiscal cooling mechanism on growth is simple: with the current levels of household indebtedness and mortgage-related arrears, any move towards a realistic interest rate level will result in economic meltdown.

No politician with any electoral ambitions will want to initiate such a move, perhaps least of all Gordon Brown, whose desire to take over the post of Prime Minister from Tony Blair is one of the less well-kept secrets in global politics.

However, the most sobering conclusion of all is that many of the country's economic fundamentals -- and the foundations for future growth -- are rather shaky.

In fact, we could be heading for the biggest bust since that of Lolo Ferrari.

And economic historians may in the future liken the "Brown Boom" to the fate of the late French actress.

Under the malign influence of her husband, Ferrari, a chronic depressive and body dysmorphic disorder sufferer, underwent 25 cosmetic surgery operations to alter her face and enlarge her breasts with silicone in the belief that it would catapult her to stardom.

Like Ms Ferrari, we have flooded our system with plastic in the quest for growth.